You’ve just launched your dream online store, “Sparkling Serenity,” offering a fascinating collection of handmade jewelry. You’ve spent endless hours perfecting your artistry, meticulously selecting the finest materials. Your website is a virtual gallery, showcasing the charm of your jewelry, but there’s a crucial element that holds the key to your success – pricing.
You have a magnificent sapphire-studded necklace priced at $2,000, and you believe it’s worth every penny. Meanwhile, your dainty silver earrings, priced at just $20, are drawing attention but hardly bringing in profits.
Your breathtaking necklace, admired by many, was out of reach for most due to its high price. On the other hand, the affordable earrings sold well but didn’t bring in enough profit. Without a well-planned pricing strategy, your dreams of enchanting the world with your handmade jewelry might dim.
Finding the sweet spot where your customers feel they are getting value for their money while ensuring your business remains profitable requires a well-thought-out pricing strategy. In this article, you will gain a clear vision of Ecommerce Pricing strategies with different real-world examples, and how to use this knowledge to price your products in your online business.
Why is Pricing Important?
Pricing is a critical aspect of any business, and in the realm of ecommerce, it holds even more significance. The price you set for your products directly impacts your sales, brand perception, customer loyalty, and overall profitability.
A well-optimized pricing strategy can attract more customers, increase conversion rates, and ultimately lead to higher revenues. On the other hand, poor pricing decisions can drive potential customers away and harm your bottom line.
What is Pricing Strategy?
A pricing strategy is a well-defined plan that outlines how you will set the prices for your products or services. It involves considering various factors like production costs, competitor pricing, market demand, and your brand positioning to determine the most effective price point.
10 Most Common Ecommerce Pricing Strategies
Here are ten of the most common ecommerce pricing strategies that businesses often employ:
Penetration Pricing
This strategy involves setting initially low prices to enter a new market or gain a larger market share. The idea is to attract customers with the low price and then gradually increase it once you’ve established a foothold.
Shifted Market Pricing Strategy
The Shifted Market Pricing Strategy is a unique approach to pricing that involves adjusting product or service prices based on changes in the market. Unlike fixed pricing, this strategy allows businesses to respond dynamically to shifts in customer demand and competitor pricing. It falls under the category of dynamic pricing strategies, as it involves anticipating changes in a shifting market and pricing for the future.
With the Shifted Market Pricing Strategy, online stores stay agile and adaptive to evolving market conditions. By monitoring customer preferences, industry trends, and competitor pricing, businesses can proactively modify their prices to maintain competitiveness and maximize profitability.
This strategy enables the online store to seize opportunities during periods of increased demand or adjust pricing during times of market fluctuations.
Skimming Pricing Strategy
Skimming pricing involves setting a high initial price for a new product to capitalize on the novelty and early adopters in the market. Over time, the price is lowered to reach a broader customer base. It is the opposite of penetration Pricing.
Skimming pricing is advantageous for online stores launching innovative or exclusive products. Starting with higher prices allows you to capture the early adopter market and capitalize on the product’s novelty.
Competitive Pricing Strategy
With this strategy, you set your prices in line with your competitors’ prices, aiming to stay competitive and prevent customers from choosing competitors solely based on price.
For online stores operating in highly competitive markets, competitive pricing helps you remain relevant and attract price-sensitive customers.
Premium Pricing Strategy
A premium pricing strategy involves intentionally setting higher prices to generate the perception that your products offer higher quality, exclusivity, and value than the normal competitors in the market.
This approach is beneficial for online stores looking to position their brand as a luxury or high-end option, attracting customers who associate price with superior craftsmanship and unparalleled customer experience. By appealing to a select customer segment willing to pay a premium for the best, online stores can maintain profitability while creating a distinct brand image.
What is Dynamic Pricing?
Dynamic pricing, also known as surge pricing or demand-based pricing, involves adjusting prices in real-time or on a short basis, based on factors such as demand, time of day, or customer behavior.
Dynamic pricing is a valuable tool for online stores dealing with fluctuating demand and competitive markets like tourism services and accommodation providers. For example during the high season hotels or other services like Airbnb can increase their prices due to the high demand.
B2B Pricing Strategies
Business-to-business (B2B) pricing strategies focus on building long-term relationships with other businesses by offering personalized pricing, volume discounts, or negotiated deals.
When operating in the B2B space, online stores face different challenges and opportunities compared to traditional retail:
Complex Sales Process: B2B transactions often involve more complex sales cycles than individual consumer purchases. Business clients may require negotiations, approvals, and coordination among multiple decision-makers before finalizing a purchase.
Larger Order Quantities: B2B customers typically place larger and more frequent orders than individual consumers. Managing inventory and meeting the demands of bulk orders can be challenging for online stores.
Customization Requirements: Business clients may have specific customization needs for products or services, requiring the online store to accommodate individual preferences and adapt to varying requests.
Longer Payment Terms: B2B transactions often involve longer payment cycles than traditional retail, leading to extended accounts receivable periods for online stores.
Competitive Bidding: In competitive B2B markets, businesses may seek quotes from multiple suppliers, requiring online stores to provide competitive bids to secure deals.
Wholesale Pricing Strategy
In this strategy, products are sold at discounted rates to retailers or distributors who buy in bulk, enabling them to resell the products at a higher price. This strategy is usually categorized under the B2B pricing strategy.
3 Tier Pricing Strategy
The 3 Tier Pricing Strategy involves presenting customers with three different pricing options for essentially the same service or product, but with varying features or options that increase the perceived value for each tier.
By offering multiple choices, online stores can cater to customers with diverse needs and budgets, encouraging them to select the option that best aligns with their preferences.
For example, a handmade jewelry online store can use this strategy:
Tier 1 – Classic Elegance: Basic necklaces made with high-quality metals and a single gemstone. Priced at $40, these necklaces are perfect for customers seeking simple elegance for everyday wear.
Tier 2 – Timeless Beauty: Mid-tier necklaces with additional gemstone variations and more intricate designs. Priced at $75, these necklaces offer a touch of exclusivity and personalization for special occasions.
Tier 3 – Luxury Charms: Premium necklaces crafted with rare gemstones, intricate detailing, and customizable options. Priced at $150, these necklaces epitomize luxury and provide a unique, one-of-a-kind experience for customers seeking the finest craftsmanship.
What is Discriminatory Pricing?
Discriminatory pricing involves charging different prices for the same product to different customer segments based on their willingness to pay or other specific characteristics.
This strategy can be tricky and sometimes dangerous for online stores, especially those who are in their beginning steps. Showing different prices to different segments based on different factors like the country, device model, OS version, or behavioral analysis, needs a high level of technical skills and deep understanding of your prospects.
Pricing Strategy Examples
Let’s take a look at some successful companies and their pricing strategies:
Amazon Pricing Strategy
Amazon uses a dynamic pricing strategy, adjusting prices based on demand, competitor prices, and user behavior. They offer personalized pricing to their Prime members and use data-driven insights for optimal pricing decisions.
Airbnb Pricing Strategy
Prices in Airbnb usually follow the Dynamic pricing strategy, targeting travelers seeking a pleasant and economical type of travel. Hosts set their own prices, but Airbnb provides data and suggestions to optimize their listings. Competitive pricing is another strategy that can be used by the hosts depending on Airbnb data.
Apple Pricing Strategy
Apple adopts a premium pricing strategy, positioning its products as high-end and exclusive, while offering cutting-edge technology and design to justify the higher price points.
Nike Pricing Strategy
Nike combines a premium pricing strategy with skimming for new product releases. The production line of Air Jordan is the major player in pursuing the Nike Premium pricing strategy. Especially the limited edition Air Jordans.
You can also notice that the price of the previous models drops after a certain amount of time and the new models are usually more expensive than the previous models.
Pricing Strategy for Starbucks
Starbucks is renowned for positioning itself as a premium coffee brand, offering high-quality, specialty coffee beverages and a unique in-store experience. Their pricing strategy reflects this positioning, as they charge higher prices compared to regular coffee chains. Customers are willing to pay a premium for Starbucks coffee because of the perceived value, the premium ingredients, the variety of options, and the ambiance of their cafes.
How to Price a Product to Sell Online
Now, let’s find out about the steps of effectively pricing your products in your online store:
Step 1: Know Your Target Market
Understand your customer demographics, preferences, and willingness to pay. Tailor your pricing to resonate with your target audience.
Using the “buyer Persona” tool can help you to master this step. This will provide you with a deeper understanding of your target which is fundamental to your pricing process.
You can read more about Persona in the “Solving the mystery of Create Buyer Persona” article.
Step 2: Analyze Your Competitors’ Pricing Strategies
Study what your competitors are charging for similar products. Differentiate your offerings while staying competitive. Knowing your competitors’ prices can help you to understand the market more effectively.
Step 3: Calculate Your Cost
Know the production, packaging, shipping, and overhead costs to ensure you cover expenses and make a profit. No matter what strategy you choose, in the long run, you need to cover your costs and make a profit, otherwise, your business will not be able to survive. Make sure you include all variable and fixed costs.
Step 4: Choose Your Pricing Strategy
Consider your target market, industry, competitors, and brand positioning to select the most suitable pricing strategy. You can look back and review the pricing strategies mentioned in this article. It will help you to decide easier.
Pro tip: Your pricing strategy should align with your business model and your marketing plan.
Step 5: Monitor Your Pricing Strategy and Test New Strategies
Regularly review your pricing strategy and adjust as needed. A/B tests new pricing models, but be cautious about sudden changes that may impact your brand image.
Business intelligence systems can really help you in monitoring your pricing strategy. Learn more in the “Uncover the Business Intelligence Implementation” article.
Pricing a Product Example
Let’s take an example of pricing for an online store that sells handmade jewelry:
Imagine you have a line of unique handmade earrings. Your target market consists of fashion-forward individuals who appreciate creativity and craftsmanship. After analyzing your competitors, you find that similar earrings are priced between $25 and $35. Your production cost per pair is $10, and you want to earn a 50% markup.
Considering your target audience and competitors, you decide to set the price at $30 per pair. As you gain a loyal customer base and brand recognition, you may consider implementing a premium pricing strategy to reflect the exclusivity and quality of your products.
Alongside the mentioned points about pricing, it is better to foresee the future trends of ecommerce to have a more reliable pricing strategy. Reading the following articles will help you gain a better perspective on the future trends in ecommerce:
How the Future of Ecommerce is Evolving
The Current and Future Impact of Artificial Intelligence on Business
Key Insights
- Pricing is a critical aspect of any business, directly impacting sales, brand perception, customer loyalty, and overall profitability in the realm of ecommerce.
- A well-planned pricing strategy can attract more customers, increase conversion rates, and lead to higher revenues, while poor pricing decisions can harm the bottom line.
- There are various common ecommerce pricing strategies to consider, such as penetration pricing, skimming pricing, competitive pricing, premium pricing, and dynamic pricing.
- Online stores can employ dynamic pricing strategies like the Shifted Market Pricing Strategy, which involves adjusting prices based on changes in the market, to remain agile and adaptive to evolving market conditions.
- B2B pricing strategies focus on building long-term relationships with other businesses through personalized pricing, volume discounts, and negotiated deals.
- The 3 Tier Pricing Strategy offers a choice of three different pricing options for essentially the same product or service, catering to customers with diverse preferences and budgets.
- Discriminatory pricing, charging different prices to different customer segments based on their willingness to pay or other characteristics, requires careful consideration and technical expertise.
- When pricing products in an online store, it’s crucial to know your target market, analyze competitors’ pricing, calculate costs accurately, and choose a suitable pricing strategy.
- Pricing decisions should be aligned with your brand identity and customer expectations, striking the right balance between perceived value and profitability.